Monster gas projects may pay no tax and royalties on $33B a year

by Michael West | May 10, 2017 | Energy & Environment, Finance & Tax, Government

This week’s budget papers show the government spending A$33 billion on education this year, nearly the same amount that Australia’s five new offshore gas fields will make in sales each year when they are running at full capacity.

Unless prices spike higher, however, these five monster projects may never pay a cent in royalties or Petroleum Resource Rent Tax (PRRT). Unless the aggressive tax structuring of the oil majors is met with equally aggressive enforcement by government, the world’s biggest oil companies – Chevron, Exxon, BP and Shell – will pay very little in income tax too. Billions each year in profit from extracting Australia’s natural resources will be funnelled offshore. It is a giveaway of immense magnitude.

Game-changer for oil giants and multinational tax avoiders

Under pressure from a campaign by unions and the Tax Justice Network, the government finally extended the Senate Inquiry into Corporate Tax Avoidance to encompass the PRRT. Hearings have recently, though not ideally, been held in Perth. The evidence was stunning.

Five new offshore gas projects are coming online: Gorgon, Wheatstone, Ichthys, Pluto and Prelude. When these are running at full production capacity they are unlikely to pay any PRRT for many years to come – the companies themselves concede it will be 2029 – and no royalties apply. The Tax Justice Network and the International Transport Workers’ Federation (ITF) say there is a good chance, on the government’s own numbers, that PRRT will never be paid on these 40-year projects.

Only 13% of this new gas capacity is owned by an Australian-based company, Woodside, which counts Shell as its key shareholder with 13%.

How could this happen?

Hearing the testimony of the oil majors before the Senate committee, the casual observer might not have detected any significant issue of national interest. That is because the oil companies were permitted to tweak the numbers in the government expert’s report and overlay their own variables.

Chevron, the biggest player in the space and operator of Gorgon and Wheatstone LNG projects, dusted off an old report it had commissioned from ACIL Allen Consulting. This claimed its contribution to government coffers between 2009 and 2040 would be a thumping $338 billion.

Although he did not reject the ACIL report as being old, managing director Nigel Hearn predicted the PRRT payments from Gorgon (now shipping) and Wheatstone (to ship later this year) would be between $60 billion and $140 billion.

Unless the price of oil and gas runs sharply higher, however, the more plausible figure is zero as PRRT won’t be paid for years, and perhaps not at all. Zero to $338 billion. You could steer a fleet of oil tankers through that gap. So how believable are the claims of the gas lobby?

In its submission, the Australian Tax Office estimated the sector had amassed $238 billion in PRRT credits, credits the companies could use for years before they started to pay significant amounts in PRRT. Further, under the PRRT as it is presently structured, exploration losses are transferable, so they can be offset against income on other projects.

Besides the flexible structure of PRRT concessions, the industry has $34 billion in carried-forward tax losses to offset against income tax, as noted in the submission by the Tax Office.

These are mostly held between the major players – Chevron, Shell, Inpex, ExxonMobil and Total – which can deploy the credits in further reducing any income tax they may owe.

In defence of these companies, they were not expecting the price of oil to halve and the present spectre of a global gas glut. The economics of the projects were based on higher commodity prices. As was the PRRT.

Exxon pays no tax, record dividends, as gas prices soar

According to Wood Mackenzie analysis conducted for the government, the gas giants would pay $US7 billion in PRRT payments over the life of the five emerging gas projects. That’s at an oil price of $US60.

At a price of $US80, PRRT of $US25 billion would be paid over the 40 years. Yet the oil price is now beneath $US50.

Chevron’s claim to the Senate committee of PRRT payments of $60 billion to $140 billion is wildly out of sync with Wood Mackenzie’s estimate of $7 billion. This is because the companies were able to take the Wood Mackenzie analysis and tweak it as they saw fit, and they surely seized the opportunity.

When asked by the committee about the assumptions underlying the group’s $60 billion to $140 billion PRRT projections – things like the oil price – Chevron executives took the question on notice.

Adding insult to tax injury

Incidentally, Chevron has now taken the mantle from BP Australia on lobbying to drill in the Great Australian Bight and its top tax executive confirmed that the exploration company was entitled to tax credits in the event of an oil spill.

Under the PRRT, said tax executive Michael Fenner, if there was a spill from a well, the company was entitled to deduct the full amount for recovery plus the 18% uplift which compounded annually.

In this event, taxpayers would effectively be paying for the oil spill as the uplift provisions are so generous that exploration tax credits almost double in four years.

The other issue with the PRRT regime is that exploration credits are 100% transferable. The ATO has identified this as a problem because the oil companies had already banked $238 billion in PRRT tax credits.

Tranferability is presumably why ExxonMobil Australia pays half of what BHP pays in PRRT on gas production in the Bass Strait.

Jason Ward, global strategist with the International Transport Workers’ Federation (which has been running a campaign to expose Chevron’s tax dodging) and who testified before the Senate, said his estimates of zero PRRT were based on industry numbers. He told the committee:

APPEA’s (oil and gas peak body the Australian Petroleum Production & Exploration Association) modelling, also done by Wood Mackenzie, shows that at an oil price of $US80 a barrel Gorgon would pay something. At $US60, there is no PRRT. Why are we giving away our resources for free to the world’s largest multinationals while the government raises taxes on working people?

At least with the LNG producers at Gladstone, the Queensland government gets a 10% royalty. Even then, says Ward, Japan collects more tax on imported Australian LNG than Australia collects in PRRT on all LNG production, and the prices of Australian gas are often cheaper in Japan.

There are no royalties on the new offshore gas projects. At the heart of the problem is that tax or royalties based on profit rather than volume are easily gamed. Profit can be manipulated, whereas sales and production cannot.

The Senate inquiry is absolutely vital to Australia’s revenue base. Unless the PRRT is reformed, billions in royalties and taxes may never be forthcoming.

This column, co-published by The Conversation with, is part of the Democracy Futures series, a joint global initiative with the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

This month, is conducting an investigation into the tax affairs of 20 top multinational companies operating in Australia. The series is sponsored by GetUp and the Tax Justice Network.

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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